Digital currencies have been around for a decade, yet the regulatory systems governing them are fragmented, ineffective and in some countries nonexistent. That allows illicit activities to flourish, from fraudulent bitcoin traders who disappear with your cash to international money laundering and the financing of terrorism. Digital currencies are the inevitable future, so international co-ordination and individual country action is required to close the legal loopholes that allow cryptocurrency crime to flourish.

Financial and regulatory experts from around the world discussed digital assets and the money-laundering risks they pose at a recent webinar hosted by Absa in collaboration with the World Economic Forum, the Global Futures Council and the Financial Action Task Force.

Regulators worldwide are challenged to find appropriate regulatory instruments to tackle risks emanating from greater adoption of cryptocurrencies. Existing regulatory instruments have limitations in addressing consumer, financial crime and money laundering risks. That has led to increased regulatory scrutiny of cryptos, as launderers have turned to digital currencies like bitcoin, ether and ripple to “cash out” their profits, bouncing transactions around the world instantly and anonymously.

In a sign of a significant shift in regulatory thinking, the Bank for International Settlements, owned by 63 member central banks and monetary authorities from around the world, has declared that “cryptocurrencies are not money, but speculative assets that can be used to facilitate money laundering, ransomware attacks and other financial crimes”.  This view comes as more than 60 central banks have embarked on digital currency projects since 2014, suggesting that some central banks consider central bank digital currencies the preferred path to protecting the integrity of the financial system over time.

The recent volatility of bitcoin has also raised important questions about the long-term viability of cryptocurrencies as an asset class. Similarly, the rise in ransomware and other financial crime incidents has led to growing concerns about regulation and how to deal with emerging mone- laundering and terrorism financing risks.

It is clear that these new forms of money present both opportunities and challenges for the financial industry, policymakers and consumers. Digital currencies can make international payments more efficient, convenient and secure, and remove the cumbersome operational and security processes linked to the movement of conventional money, improving overall economic efficiency.

However, while cryptocurrencies are becoming widely adopted as more ordinary people invest and institutional investors add them to their portfolios, their growing prevalence raises important questions around financial stability and preventing money laundering and the funding of terrorism.

When it comes to combating these crimes, regulators need to work alongside technology experts so their laws keep pace with the changes. In addition, regulators need to be forward-thinking and design laws that are fit for purpose, and not try to prevent the inevitable.

Collaboration is key, and digital assets require regulating through international co-operation, local enforcement and by authorities technologically equipped to keep track of these fast developments.

In 2019, the Financial Action Task Force introduced guidelines that obliged countries to assess and mitigate the risks associated with crypto asset activities and service providers. It called for service providers to be registered and supervised by competent national authorities. Yet, the task force reports that only a quarter of countries have adopted those guidelines.

While some jurisdictions have put anti-money laundering frameworks in place and sanctioned traders that don’t conform, criminals could quickly move to unregulated countries through this lack of global uniformity. Implementing the so-called travel rule is going to be essential to remove the jurisdiction arbitrage. It is also vital to remove the anonymity of asset transactions and collect data about them.

The Financial Action Task Force is updating its guidelines and encouraging more information sharing between countries, and it agrees that strict regulations wouldn’t stifle innovation but would strengthen the industry and lead to more economic growth.

Here in SA, buying crypto assets is not regulated, and according to justice & correctional services minister Ronald Lamola, this lack of protection has left consumers extremely vulnerable, with some hopeful investors having lost large sums of money.

Though some trading platforms and financial institutions have implemented the “know your client” protocol, this is not a general practice. This renders us vulnerable to syndicates that buy crypto assets for money laundering, funding terrorist activities, and attempting to circumvent exchange controls and mask illicit financial flows.

Intergovernmental collaboration to create an agile but effective regulatory framework is vital, with unified responses to developing trends. While SA already has an interdepartmental working group investigating financial fraud, including the police, the Hawks and SA Revenue Service, there are plans to expand that intelligence centre to include service providers in the crypto assets field.

Other emerging digital assets include central bank digital currencies, of which about 20 are in development, with the People’s Bank of China planning to replace physical cash with a digital currency known as the e-RMB or digital yuan. Chinese citizens taking part in a pilot project in several cities can download an app and enter a lottery to win money to spend with appointed service suppliers.

Those taking part in the Chinese pilot project say the digital yuan is convenient, efficient and secure. Central bank digital currencies would enhance international trade, and China’s early-mover advantage could turn its currency international because of its security.

One challenge is to figure out how to make different central bank digital currencies interact with one another, and the IMF is researching the cross-border use of digital money. Questions are being raised over the effect this “currency substitution” will have if a foreign system is used in parallel with a domestic currency, and whether it will undermine the domestic currency and affect exchange regimes.

Blockchain technology is allowing the world to think differently about money and economic ideas and create much-needed innovation in the financial markets. Once scalability issues with blockchain are ironed out and technological solutions reduce the risk of fraud, digital currencies would deliver a positive experience around the world.

Previous financial crises have shown how the world’s systems are interconnected, and the speed at which crypto assets could be moved means the authorities would struggle to monitor and stop or reverse transactions across those vast networks. Cross-border dialogue is imperative, particularly between technology bureaus to police the situation.

The reality is that cryptocurrencies are a decade old, and financial institutions should have responded faster. But tackling issues like the anonymity that allows crypto crime to flourish can’t be addressed by existing regulations or systems.

We need to do it properly and do it well, so it lasts for the future. That may mean we go a little slower, but if we want to be effective it’s important that the rules and tools are fit for purpose.

• Siwisa is head of public policy for Absa Group.


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